China's economy to become third largest in the world by year-end

China’s economy grew so rapidly in the first half of 2007 that it is likely to overtake Germany as the world’s third-largest by the end of this year, behind the U.S. and Japan, analysts say. The release of January to June figures for Asia’s second biggest economy provides fresh evidence that Beijing’s economic braking measures have had little effect.

China’s sizzling economy expanded even faster than originally thought last year, with the government revising 2006 growth of gross domestic product (GDP) to 11.1 percent from 10.7 percent. Data released by China’s statistics bureau last week showed the economy was worth 21.09 trillion yuan in 2006, about $2.65 trillion based on last year’s average exchange rate of 7.97 yuan to the dollar, but its 2.5 percent growth rate was well below China's.

The revision puts China in striking distance of Europe’s largest economy within months. “With this upward revision, it is highly likely that China will bypass Germany to become the third-largest economy in the world in current US dollar terms by the end of this year,” said Hong Liang, an economist at Goldman Sachs. As per the Goldman Sach's Report titled "DreamingWith BRICs: The Path to 2050" and published in 2003, in US dollar terms, China could overtake Germany by 2007, Japan by 2015 and the US by 2039. These predictions are becoming a reality. According to the World Bank, Germany’s economy was worth 2.9 trillion dollars at the end of 2006. Economists expect GDP in the second quarter to near or equal its breathtaking January to March pace of 11.1 percent growth.

JPMorgan Chase Bank economist Wang Qian put the second-quarter acceleration at 10.6 percent, and said it would pick up speed in the second half of the year. “We don’t see any sector of the economy slowing down. It’s firing on all cylinders,” said Wang. The torrid pace of development means that China’s economic czars will once again have to devise fresh ways to prevent the export powerhouse from the kind of overheating that could trigger a slide into financial crisis. Regulators have already taken this year introduced a slew of piecemeal administrative measures to slow the economy, including two interest rate hikes, five increases in bank reserve requirements and new export curbs.

Exports, one of Beijing’s biggest headaches given the friction it causes with its two largest trade partners, the European Union and the United States, have continued to flood international markets. The widening trade gap is on route to becoming the globe’s largest ever after Beijing announced last week that its surplus had jumped more than 85 percent in June to $26.91 billion. Although the June figure was partly due to factories rushing to beat new curbs on exports that took effect July 1, the huge global demand for Chinese goods means the surplus will expand through the rest of the year, analysts said.

“China has become the world’s factory for manufactured consumer goods,” said Qu Hongbin, a senior economist at HSBC in Hong Kong. “If global consumer demand remains then Chinese exports will grow. There is not a lot that government policy can do about that.” Washington and Brussels believe one step to staunching the tide of Chinese goods would be greater appreciation in the currency, which trade partners say is artificially low and boosts China’s business competitiveness. But China’s autocratic leadership fears that could destabilise its financial system, making such a step highly unlikely, in keeping with the government’s repeated position of allowing the yuan to rise slowly. Earlier this month the nation’s top economic planner said China had to further tighten macroeconomic controls in the second half in the face of growing financial risks.

“The trend is of an economy that is moving from a bias of fast growth to overheating,” said a research arm of the National Development and Reform Commission. Li Huiyong, chief analyst at Shenyin Wanguo Securities in Shanghai, said the government had to get cracking. “At the moment, there is no obvious change to the overheated economy, with inflation and investment (levels) likely to jump,” said Li. “Under such circumstances, the major task is to prevent further overheating and strengthen controlling measures.”

In fact, a WallStret Journal report says China's imminent overtaking of Germany is only one instance of a broader global shift, according to the report. As populous countries such as China and India become major forces in the world economy, established powers such as Europe, Japan and the U.S. are becoming relatively less important, the Journal said. Many economists already argue that global growth is becoming less dependent on the U.S. economy, which has slowed in the past year without greatly affecting others, according to the report.

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• China poised to become third-largest economy - Marketwatch by Dowjones - 15-07-2007